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Closed-end Funds Trading at Discount, Impressive Yields

By Crucial Clips     January 27, 2016
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Jan. 11, 2016 

Murray Coleman, Reporter, FAIQ

"Hi, this is Murray Coleman with FAIQ. I’m here today with Len Templeton, president of Templeton Financial Services in Chandler, Arizona.

“And, Len, you’re looking at a rather obscure part of the market that you think holds a special appeal for investors right now, correct?”

Len Templeton, President, Templeton Financial Services

"Yes, Murray. Thanks for having me on here. Been looking at closed-end funds, especially high-yield and emerging market debt funds.”

Murray Coleman

"Okay. And explain to people in case they don’t know about closed-end funds what exactly they are.”

Len Templeton

"Well, closed-end funds are similar to ETFs, or exchange-traded funds, but there’s not a mechanism for them to trade at net asset value like there is for ETFs. And so when investors want to sell, sometimes they can end up trading at deep discounts to the net asset value. And that’s kind of the situation that exists currently.”

Murray Coleman

"Okay. So I guess your clients who need to increase their bond holdings or replenish their bond holdings, they can do so and kind of get a bargain in the process, correct?”

Len Templeton

"Yes, basically what we normally do are managed portfolios of individual securities. And that are bonds. The problem with the closed-end funds is there’s not always a great opportunity there. So it’s difficult to have a strategy that’s a closed-end fund strategy.

“So what we’ll do is opportunistically, when we see some great opportunity come along, we’ll use these to supplement our portfolios, especially for clients that are looking for ways to increase their income.”

Murray Coleman

"So we’re talking maybe 10, 15 percent on the edges?”

Len Templeton

"These are currently trading at discounts of 10 to 15 percent and they’re providing yields of anywhere from about 8 to 12 percent.”

Murray Coleman

"Wow. So you get a discount on the price buying these and you also get decent yield.”

Len Templeton

"Yes. I wouldn’t consider putting more than maybe 20, possibly up to 25 percent in a portfolio. I would say in general there are just some issues with the closed-end funds that create opportunities. One of the problems is, it’s not as big of a market, there’s no institutional following for these funds, the liquidity isn’t as good as you might like to see in other investments, and they tend to be more volatile than regular bonds.”

Murray Coleman

"Okay. And also in order to get such heightened yields, they’re usually using some leverage, right?”

Len Templeton

"Yeah, most of these funds are leveraged funds. They have leverage of anywhere from about 25 to 35 percent.”

Murray Coleman

"Okay, so that’s something to keep in mind, I guess, too.”

Len Templeton

"Yes.”

Murray Coleman

"Okay, thank you very much for your time today, Len.”

Len Templeton

"All right, thank you, Murray. Have a great day.”

[end of audio]